Financing Terror: From Bogus Banks To Honey Bees

A comprehensive campaign against international terrorism is impossible without blocking the channels of its financing. This is no easy task. Currently, about US$3 trillion are transferred daily from one party to another within international financial markets. But of that total, it is estimated that the annual amount used to finance terrorism does not exceed several hundred million dollars. The task of identifying the deals related to terrorist funding is akin to finding the proverbial needle in a haystack.

This is not the only problem. In many cases, terrorists’ money is of legal origin, and cannot even be described as “laundered”–the process by which originally criminal income is organized to penetrate legal systems to hinder detection. Yet money laundering does plays a role. For instance, an estimated US$100 billion is laundered every year, most of it by drug dealers. Connections between terrorists and narcotics traffickers are well-known, including those that link al Qaeda with the heroin trade in South Asia.

Perhaps the greatest challenge arises in preventing the flow of money for and among terrorists through legal and sub-legal methods. Al Qaeda has been known to use several methods for its funding, including manipulating import and export receipts, utilizing correspondent accounts, purchasing foreign banks, taking advantage of the parallel “hawala” banking system, and establishing charitable front organizations; all of these are described in further detail below.

Overstatement

One of the simplest methods for moving money is to overstate (over-invoice) the price of an imported commodity, enabling its exporter to obtain additional money and to then transfer it to a terrorist organization. Bin Laden’s network used this practice in the case of honey supplied from the United States to Yemen and other Arabian countries. The price of this honey exceeded the average world level by 50 percent. This enabled the Arabian honey importers to transfer almost a quarter of a million dollars to al Qaeda operatives in the United States. In this case, however, the honey’s price was so high that it attracted the attention of authorities and the link was uncovered. In deals involving larger amounts of goods, the price deviation may be much less and therefore that much more difficult to detect.

Understatement

Another related means of terrorist financing is through understatement of export value. This has been found to affect goods, particularly from South Asia, that make their way through middlemen in Gulf ports and are then re-exported to other countries through offshore zones. This allows exporters to evade high customs duties in their countries. The underground bankers and traders involved earn significant sums of money through such evasion.

One of the most active offshore zones is Dubai, of the United Arab Emirates. The former Taliban regime’s diplomatic ties with the UAE likely helped facilitate Afghan-based terrorists in conducting financial deals through Dubai companies. It is believed that huge amounts of criminal income, including some of drug dealers, are also laundered in Dubai. While officially denying this charge, the UAE has begun to impose more rigid conditions on the activities of its national banks. After September 2001, illegal financial operations became punishable by lengthy prison terms and sizable monetary fines.

Correspondent Accounts

Correspondent accounts are used in a large number of the millions of banking deals done daily throughout the world. They enable banks to finance operations in countries where they have no branches. On receiving an instruction from a correspondent bank to pay an amount, however, the foreign bank has no idea regarding the company or person authorized to receive the money. Operations with correspondent accounts can be stopped only if the originating bank is blacklisted. In the early 1990s, the Ash-Shamal Islamic Bank of Sudan remitted about US$250,000 to the branches of two large U.S. banks. This amount was received by al Qaeda members in Texas. American authorities were able to put an end to this practice only after they identified Ash-Shamal as involved in financing terrorists.

Bank Control

Another method of both money laundering and the use of legal channels for funding terrorist activity involves purchasing a foreign bank or controlling a significant portion of its shares. Bin Laden, for instance, is believed to have founded Ash-Shamal. When the remitted amounts are insignificant–not exceeding tens of thousands of dollars, enough to finance an individual terrorist–and the payment instruction is e-mailed, the transaction attracts little notice.

Hawala

Money orders, especially through the so-called parallel banking system, are another means by which terrorists, including al Qaeda, are known to support their activities. This is a method of transferring money that goes back centuries and operates outside of the channels of official banks. The centers of this system are in the rich Gulf oil states. There it is known as “hawala,” which means “trust” in Arabic, since no documents fix the transfer. Some of these underground bankers work through small offices; others operate through businesses that serve as a shelter for their main activity or a source of an additional income. Most of the companies that do this–such as jewelry shops, travel companies or bars–are recipients of a significant amount of cash. An operator of such a system may receive cash in Dubai and tell his brother, cousin or nephew, who lives in New York or Texas, the password. Or he may send a coded check to him, enabling him to receive the remitted amount. The password is told by phone, fax or e-mail. It is next to impossible to trace money remittances made via the hawala system. The annual turnover of hawala in South Asia and the Gulf countries is estimated at US$20 billion.

Charities

Terrorists also are financed through charitable organizations, especially religious ones. This has often proven successful because of the difficulty involved in distinguishing between a charitable foundation that simply grants money to mosques and religious schools to promote Islam and its culture from one that finances terrorists. International law enforcement and intelligence officials have been successful at uncovering some of these organizations, but it can be safely assumed that many others continue to exist.

The United States and other Western countries have recently attempted to tighten legislation to limit money laundering and the financing of terrorism through these various methods. Yet since drug dealers have successfully evaded similar measures aimed at their activities and have still managed to launder approximately one trillion dollars over the past decade, it is doubtful that the channels used to finance terrorism can be entirely blocked. Terrorist groups will continue to require and dispense money in order to motivate extremists, to hire killers and to purchase materials. Terrorism is the plague of the twenty-first century and must be combated by all means, but the struggle against it will undoubtedly be a prolonged one.